Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2002

And the saga continues . . .

In Pool Concepts, Inc. v. Watkins, Inc., Bus. Franchise Guide (CCH) ¶ 12,249 (D. Minn. Jan. 20, 2002), a Minnesota franchise dealer of Caldera products (“plaintiff”) filed suit against a California manufacturer of Caldera products (“defendant”) after defendant threatened termination.

 

The principal dispute was whether plaintiff paid a franchise fee. Under the Minnesota Franchise Act, a “franchise fee” means “any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business . . . .” Minn. Stat. § 80C.01, subdiv. 9.

 

According to plaintiff, the following payments to defendant constituted franchise fees: “(1) the payment of funds by plaintiff to defendant that are ultimately transferred by defendant into the so-called ‘co-op’ advertising fund, (2) the sales literature that defendant required plaintiff to purchase and (3) the minimum parts inventory that defendant required plaintiff to maintain in excess of plaintiff’s desires and/or requirements.”

 

Ultimately, the court rendered the co-op advertising program to constitute a “franchise fee,” reasoning that “when plaintiff purchases spas from defendant, it is purchasing the spa and also the ability to participate in the co-op advertising fund that is created as a result of the transaction. The money that defendant collects from plaintiff for spas includes the funds defendant contributes to the co-op fund. Moreover, the payment of funds is not optional, as it is tied to the purchase of spas. Because the money for the co-op fund comes directly from plaintiff . . . this money constitutes a franchise fee.”

 

Takeaway: Mandatory contributions to an advertising fund have been found to satisfy the franchise fee element of the Minnesota Franchise Act.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.